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What Is a HYSA (High-Yield Savings Account), and How Does It Work?

Put your money to work for you with a high-yield savings account (HYSA).

Justin Cupler

Contributing Writer at Tally

November 2, 2021

Banks have multiple bank account options, ranging from checking accounts to money market accounts to certificates of deposit (CDs). One such option is a high-yield savings account (HYSA). 

A HYSA is a growth account where your cash can earn interest. Unlike other growth accounts at the bank, the cash in a HYSA is accessible, with some limitations. Its growth potential and the accessibility of the cash within the HYSA make it an attractive option for many. 

Let’s dig deeper into:

  • What a HYSA is 

  • How they work 

  • What scenarios they’re best suited for 

What is a HYSA?

A HYSA is a high-yield savings account that offers a significantly higher interest rate than a typical savings account. Generally, a HYSA's interest rate is 15 to 20 times higher than a traditional savings account

According to the FDIC, the national average interest rate on a savings account is 0.06%, meaning a HYSA will usually yield 0.9% to 1.2% interest. 

Where can you get a HYSA?

A HYSA is a relatively common account type at most large national banks, credit unions and even smaller local banks. You may also open a new account through an online bank with no physical branches. In some cases, online banks pay more interest because they lack the additional expense of brick-and-mortar branches. 

What are the benefits of a HYSA?

A HYSA has plenty of benefits going for it. Let's run through them.

Relatively high interest rate

HYSA: A woman uses her phone and a notepad to calculate her interest

As mentioned above, a HYSA offers an above average interest rate when compared to a traditional savings account. So, instead of 0.06% interest, you could earn 0.9% to 1.2% interest. 

While that's still not going to make you rich, you’ll be able to take advantage of compounding interest and consistently earn interest, albeit variable interest, without requiring any investing skills. 

So, if you put $1,000 into a 1.2% APY HYSA that compounds interest monthly and continue contributing $100 per month for 20 years, you would have $28,380.77 in your savings. However, if you compare that to a 0.06% savings account, which would net you just $25,156.04. That’s an extra $3,224.73 in interest.

More flexibility

There are some products, like certificates of deposit (CDs), that may bear the same or higher interest rates than a HYSA. However, these accounts have strict rules about withdrawing cash before they reach maturity that could cost you in fees and penalties. 

You can withdraw money from a HYSA up to six times per month without fees. This means if an emergency strikes, you can pull cash out. With a CD, you forfeit a portion of the earned or predicted interest over a set number of days when you withdraw cash before maturity. 

Some HYSAs also include a debit card, making it easier to access the money. You can even streamline your savings by adjusting your direct deposit at work to automatically deposit a portion of your pay into the HYSA.

No investment knowledge needed

Sure, you can invest in the stock market and potentially make about 10 times what you could from a HYSA. However, to do so, you need a high level of understanding in stock trading or hire an investment advisor to help guide you — and take some of your profits along the way. You also need to be willing to take on risk. 

With a HYSA, you can make deposits and simply let them earn interest. No buying and selling stocks or worrying about losing money from a stock crash. 

What are the drawbacks of a HYSA?

A HYSA has lots of benefits, but there are plenty of drawbacks too.

Limited withdrawals

With a HYSA, the law limits you to just six withdrawals per month. If you exceed the six per month, your bank charges a penalty. In a traditional savings account, you can typically make as many withdrawals as you'd like. 

Interest rate may vary

While an HYSA may have a significantly higher interest rate than other savings accounts, its interest rate isn't fixed. Instead, it’ll vary based on the current market. So, if the interest rates fall due to a financial crisis or another reason, the interest rate on your HYSA will likely fall, too. 

On the flip side, the interest rate could also go up, but the inconsistency makes it difficult to predict. 

Low interest rate compared to other options

A person looks at investment charts on a tablet

A HYSA has a significantly higher interest rate than the standard savings or checking account, but even then, it's very low. While a HYSA can average just over 1% annual percentage yield (APY), the stock market has historically returned about 10% on investment. 

That same initial $1,000 investment then $100-per-month investment outlined above could be worth $83,264 after 20 years in the stock market at a 10% return over the past century. Remember, though, investing comes with the potential risk of losing most or all your money in the event of a stock market crash. 

Thanks to FDIC insurance, you don’t risk losing your money in a HYSA as you would in the stock market. 

Minimum requirements

Some HYSA accounts have very strict minimums to get the most out of them. Some may offer 1% interest or higher, but only on accounts with large balances, such as $25,000 or more. There may also be minimum initial deposits to open one, such as $500 or $1,000. 

What is a HYSA good for?

This high-interest bank account isn't for everyone, but there are specific situations it's great for. Here are a few times a HYSA is helpful. 

Storing an emergency fund

Start saving your three- to six-month emergency fund in a HYSA. It not only earns interest, but it also keeps you from dipping into it for frivolous reasons because of its firm six-withdrawal limit. 

If you build a $5,000 emergency fund and leave it in a 1% interest HYSA untouched for a year, that account would be worth $5,050 at the end of the year. The following year, the interest earned would be based upon the $5,050 balance, leading to more interest. 

Building moderate-term savings

If you have any short- to moderate-term savings goals, meaning goals that are five years long or shorter, a HYSA may be a good option. These can include saving a down payment for a new home or car, saving for a vacation, saving for a new television and more. 

A HYSA is an option in this case because it gives you a place to build your savings separately from your daily spending cash and pays you interest. The interest may be small, but its withdrawal limitations may mitigate the urge to dip into the savings for other reasons.

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What should you consider when choosing a HYSA?

When considering a HYSA, there are several factors that will help you decide which is best for you. 

Interest rate

The first and likely most important consideration for a HYSA is its interest rate. These can vary greatly between accounts, and some pay significantly more than others. 

However, be aware of tiered interest rates too. Some HYSAs have tiers where the interest rate gets higher with your balance. If the bank you’re considering has tiered interest, look at what tier you'll fall into with the balance you expect to carry.

Interest compounding frequency

Another variant to consider is how often the bank compounds your interest. Banks can compound interest as frequently as daily, monthly, quarterly, semiannually or annually. The most beneficial for your account's growth is daily compounding. 

When shopping for an HYSA, try to find one that offers a high interest rate and compounds daily for maximum growth. 

Minimum opening deposit

Many HYSAs will have no minimum opening deposit or at least a minimal one. However, some banks could require a significant deposit that you may not have. Be sure to check this before going through the process of opening the account. 

Minimum balance

While many banks have moved away from minimum balance requirements, some continue to require them and will charge fees if you fall below it. This includes some HYSAs. Check the terms before signing up to verify there is no minimum balance or the minimum balance is realistic for you. 

Ongoing fees

Generally, HYSAs don’t have monthly fees, but some will. Remember to check the terms and conditions of a HYSA you're considering to verify there are no fees. 

Withdrawal options

When considering your HYSA options, look at their withdrawal options. Some HYSA accounts have strict limitations and may require you to do all transactions online or at a brick-and-mortar bank. Others, however, are more convenient and may allow you to use an ATM card to access the cash. 

FDIC membership

Finally,  make sure the bank you're considering is a member FDIC. The FDIC insures the cash that's in your bank account. So, if the bank goes out of business or suffers a severe financial loss, you won’t lose your money. It’s likely rare that you would come across a bank that's not a member FDIC, but it's worthwhile to verify it. 

Let your money work for you with a HYSA

A woman uses a calculator to add up her savings

You work hard for your money. Now you can make it work for you by growing with a HYSA. Unlike investing, a HYSA is a set-it-and-forget-it way to allow your cash to earn interest. Yes, the interest returns are low compared to the average returns in the stock market, but there’s no risk of losing your money, and you don't need investment knowledge. 

If you're only seeking continuous and steady growth, it can be a win-win. 

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